Stakeholder Engagement in Company Decisions: Lessons from the German Corporate Governance Model
Long-term sustainable value creation and better alignment of interests of companies, shareholders, managers, and stakeholders are the key goals of the European Commission ongoing work on sustainable corporate governance. Harmonizing governance practices in the EU is challenging, however, as the continent features different and well-established models, and each member state has its own corporate governance code.
On 16 March, CFA Institute hosted a webinar (held under Chatham house rules), which follows the publication of the CFA Institute and CFA Society Germany report “Stakeholder Capitalism in Action.” Webinar participants discussed the peculiarities of the German corporate governance model, which focuses on the integration of employee interests into company activity, and evaluated whether some of its characteristics could be imported at the EU level.
The discussion focused on employee co-determination, which is a practice that is required by law in Germany. This procedure involves the close cooperation between management and employees that is necessary to bring long-term success to the company. Companies also can voluntarily create Works Councils, which are a democratically elected group representing all company employees. Such councils represent only the interests and needs of workers employed by the company, and therefore they differ from trade unions, which protect a wide spectrum of people and have a more political agenda.
The Works Council model seems to operate particularly well with the two-tier board system, which is a corporate structure required for listed companies in Germany. The two-tier model is a prerequisite for Works Councils to be really effective because it includes a management board that is overseen by a supervisory board. Representatives of employees and shareholders also sit on this board.
Although this model makes the decision-making process longer and more tedious, the benefits, including better communication and mutual understanding as well as enhanced employees’ motivation, are worth the trade-off. Representatives of employees in the Works Council can be seen as intermediaries between the interests of the company and those of the employees as they regularly talk to management.
The report includes six in-depth interviews with representatives from German companies that illustrate how the employee co-determination system affects their organizations. All of the interviewees agreed that their company benefited from this employee participation structure, especially during organizational crises. In addition, one of the interviewees pointed out that this model of corporate governance has an impact on company shareholder structure as long-term investors are more willing to invest in an organization that establishes an employee participation system.
Webinar participants also highlighted that companies would prefer to have the free option of applying the employee co-determination system, rather being forced by law to integrate this in their corporate governance. As the report underlined, however, German firms adopting such a model have an enhanced level of employee engagement in company decisions.
European companies are expected to build up a more constructive dialogue with their shareholders and stakeholders to establish long-term relationship and better align the interests of the company with those of investors and the wider society. The adoption of a similar corporate governance model to the one used in Germany with the establishment of Works Council could shape this type of engagement and bring about more open and transparent company boards.
The adoption of stakeholder capitalism in Germany shows that profit-oriented organizations can succeed and be profitable, while also considering stakeholders, including employees, in the decision-making process. Hence, because stakeholder capitalism looks to satisfy society stakeholder needs, it does not necessarily go against shareholder interests.
A previous post on the “Stakeholder Capitalism in Action” report can be found here.
A podcast focusing on a conversation with Josina Kamerling; Susan Spinner, CFA; and Martina Bahl, CFA (three of the co-authors of the report) is available here.
